October 05, 2016
Martin Wolf writes: “banks remain highly fragile businesses. By their nature, banks are highly leveraged entities with ultra-liquid liabilities and far more illiquid assets…What remains disheartening is that shareholders and a few small fry among the employees have been punished, but the decision makers who ran these institutions have escaped more or less unscathed.” “Deutsche Bank offers a tough lesson in risk” October 5.
Wolf is totally correct on that! But, may I ask, what about the responsibility of regulators who, against all common sense, allowed banks to leverage their equity and the support they received from society; limitless when lending to its own or to a friendly sovereign; over 35 to 1 when financing residential mortgages; and 62.5 to 1 only because a human fallible agency rated a creditor AAA to AA?
There’s been absolutely nothing of holding those regulators accountable, worse yet they are still in charge of the most important monetary policy decisions.
And what about the responsibilities of leading opinion makers like Martin Wolf himself, when they refuse to acknowledge the extremely serious distortions in the allocation of bank credit to the real economy risk weighted capital requirements for banks produce?
I am currently reading Philip Ther’s interesting “Europe since 1989”. Already I do not how many times in the very first chapters I have seen neoliberalism and deregulation mentioned. What a difference a year makes! Had Ther began his history in 1988, he might have had to include the Basel Accord with its risk weights of 0% for the Sovereign and of 100% for We the People. Frankly, when all is said and done, the Basel Accord’s statism and miss-regulation has trumped all neoliberalism and deregulation.
As for the Deutsche Bank, its best chance for a sturdier future, lies in regulators telling all banks to abandon the business model of maximizing returns on equity by minimizing capital that their regulations promoted.
Let us pray, for our children’s and grandchildren’s sake, that banks return soon to earn their returns on equity by evaluating risk adjusted interest rates and size of exposures, without any considerations to capital requirements.